Should you remain opted out of the State Second Pension?

By Mark Hodson, Senior Adviser (pictured)

If you were born before 1968 you could suffer financially if
you have opted out of the State Second Pension (previously known as SERPS).

Since the late 1980s it has been possible to opt out of the State Second Pension, known as ‘contracting out’. This means that the government pays some of your National Insurance contributions into your own personal pension.

It is likely that this option will be withdrawn in 2012 but if you are currently contracted-out you should consider carefully whether it is in your best interests to stay contracted-out between now and then.

It is important to realise that the State Second Pension benefits are guaranteed, whereas those of a contracted-out policy are not. The benefits you will receive from your pension if contracted-out will depend on a number of factors:

• How much is paid in
• How the money has been invested
• How much growth there has been in the fund
• The charges in the policy
• Annuity rates at retirement

If you are contracted-in, your pension benefits will be calculated by the following:

• The amount of National Insurance contributions that have been paid
• Your overall earnings above the State Second Pension threshold
• The prevailing government’s pension policy

Because the Government has imposed a cap on rebates, if you were born before 1968 you could suffer financially if you remain contracted out.

If you are unsure if you are contracted-out you can either contact your pension provider or contact the HMRC contracted-out helpline on 0845 915 0150. Please remember to have your National Insurance number to hand when calling.

If you would like any help or advice on whether or not to remain contracted-out, then please contact me on 01483 205890.